Types of Business Models

Business Models

• A business model may be defined as the

manner in which a business organizes itself
so as to achieve its objectives, which
normally involves the generation of profits.
– The way in which revenue is generated
and the way in which costs are controlled
or eliminated
• Traditional business models have evolved
around a central product or service
– E.g. Ford motor company in the text
– This has continued even with the recent increase
in service companies
Business Models

• Paul Timmers defined business model as:

– “An architecture for the product, service and
information flows, including a description of the
various business actors and their roles; and
– “A description of the potential benefits for the
various business actors; and
– “A description of the sources of revenues
– Definition complicates the definition and makes it
more dynamic
• “The method by which a firm builds and uses its
resources to offer its customers better value than its
competitors and to make money doing so.”
- Afuah and Tucci
Business Models

• Michael Porter
– “ The essence of strategy is choosing to perform
activities differently than rivals do”
– Competitive strategy is about being different.
– Deliberately choosing a different set of activities to
deliver a unique mix of value
• Some definitions do not make a clear
distinction between strategy and models
Internet Business Models

• Using the internet as a tool for

implementing a business model
• New Business Models – MusicNet
– Subscription service to download music
Generic Business Models on the Web

• Brokerage
• Advertising
• Infomediary
• Merchant
• Manufacturer
• Affiliate
• Community
• Subscription
• Utility
• See table 2.1 P.24
Brokerage
• Brokerage
– Charge a fee for transactions enabled on their site
– Also called market makers because they bring
buyers and sellers together
– Includes
• Buy / Sell fulfillment sites – Financial
brokerage, online travel agents
• Market exchanges – B2B market exchanges
• Business trading communities – B2B within an
industry
• Buyer aggregator – take advantage of volume
buying
• Distributors – B2B – broker facilitates
transactions
• Virtual malls – hosts online merchants
Brokerage
• Metamediaries – more service than a virtual
mall but similar such as billing and collection
(Amazon. COM)
• Auction brokers – conducts auctions like eBay.
COM
• Reverse auction – prospective buyer enters an
order for a good and a price – Priceline.COM
• Classifieds – provides classified ads like in
newspapers
• Search agents – search internet for best price
• Bounty broker – offers a reward for finding a
person or desired item
Generic Business Models

• Advertising
– Must have a large enough volume
– Can also create personalized portals
• Infomediary – free access if fill out survey
• Merchant – seller can be bricks and mortar or
bricks and clicks
• Manufacturer – sell to market directly
• Affiliate – exchanging of banner ads
• Community – depend on user loyalty
• Subscription
• Utility – user pay site
Corporate Strategic Planning –
Internet Strategy
• Is there a role for traditional corporate
strategic planning?
• “launch and learn”
• For some, the corporate strategic plan is
indistinguishable from the Internet strategy
• Treat the Internet strategy as a separate
exercise?
The Components of an IT Strategic
Plan (1)

• The Business Model to be used for the

web
– The Data Architecture - defines the data
elements and location needed
– The Application Architecture - structure of
applications that is necessary
– The Technology Architecture - the
hardware, software and other infrastructure
components
The Components of an IT Strategic
Plan (2)

• The Migration Plan - process of determining

how current data, application and technology
architectures will be moved to the planned
architectures
• The Tactical Plan - includes the funding and
the detailed project management
Pitfalls in Internet Strategy

• Failure to link the Internet strategy to

the general enterprise strategy
• Assuming that customers will come to a
Website
• Inadequate resources
• Training/communication weaknesses
More Pitfalls

• Defining who will be responsible for the

Website and who owns Internet projects
– i.e. user department, the IS department,
marketing, public relations, or a senior
executive
• Balance of management/technical
people on Web projects
Summary of Business Design

• Focus on customers
• Create value with continuous innovation
• Transform business processes into digital form
• Decentralize management but centralize
coordination
• Create an e-business application architecture
• Integrate, but plan for continuous change
e-Business to Consider
“Many of our competitors have tried to copy
elements of the way we do business, with little
• Dell success. In fact, we believe Dell is widening the
fundamental advantages of our direct business
model.”
2000 Annual Report

Sales = $25,265,000,000 and rising

Why can other competitors not match Dell’s performance?

A Business Model

• A business model is a group of shared

or common characteristics, behaviors,
and methods of doing business that
enables a firm to generate profits
through increasing revenues and
reducing costs.
Business Models
Two categories of Internet businesses--
pure-play vs. bricks-and-clicks:

Pure-play businesses Bricks-and-clicks

have an online businesses combine
presence only. a physical presence
with an online
Examples: presence.
Amazon.com, eBay,
and Slate.com Examples: Barnes
and Noble,
Nordstrom, and the
New York Times
 Fundamental Models of e-Business

Business originating from...

Business Consumers

And
Business
B2B C2B
selling
to...
Consumers
B2C C2C
Business-to-Business Model

• Many e-businesses can be distinguished from

others simply by their customer focus.
• For instance, some firms use the Internet
mainly to conduct business with other
businesses. These firms are generally
referred to as having a business-to-business
(B2B) model.
• Currently, the vast majority of e-business is
B2B in nature.
B2B Pure-Play Business Models

Business markets are unique in many

ways:
ƒ High value of purchases ƒ Team selling
ƒ Large order size ƒ Vendor/value analysis
ƒ Items purchased ƒ Leasing
ƒ Purchase specificity ƒ Competitive bidding
ƒ Team buying ƒ Derived demand
ƒ Use of buying specialists ƒ Cyclical demand
ƒ Special services required ƒ Number and location of
buyers
B2B Pure-Play Business Models
(continued)

EDI/Extranets:

EDI Systems Extranets

Created on a closed An intranet that is
network—systems did adapted so that
not speak to one external parties are
another. provided varying
degrees of access to
information.
B2B Pure-Play Business Models
(continued)

B2B marketplaces—net markets:

ƒ Broadly described as all online marketplaces

where buyers and sellers congregate to
exchange goods and services for money.
ƒ Net markets can be organized either
horizontally or vertically.
B2B Pure-Play Business Models
(continued)

Three types of net markets include:

1. Buy-centric markets are organized by large,

influential buyers as a place where small and
fragmented sellers can sell their goods.
2. Sell-centric markets are markets where one or
more big sellers build a marketplace for
small, fragmented buyers.
3. Neutral exchanges appear when both the
sellers and the buyers are fragmented.
B2B Pure-Play Business Models
(continued)

Why would an established business use

net markets?
ƒ Selection of buyers or sellers (global markets) is
greater.
ƒ Dynamic markets may be a great place to move
inventory quickly.
ƒ Efficient exchange process minimizes employee
time.
ƒ Prices are low due to expanded access to sellers.
ƒ Some one-time deals are available only to online
audiences.
B2B Pure-Play Business Models
(continued)

Challenges faced by e-marketplaces:

ƒ Building traffic is a big challenge for e-

hubs.
ƒ Competing e-marketplaces.
ƒ Integrating other sales channels with e-
marketplaces.
B2B Pure-Play Business Models
(continued)

What separates the top B2B companies

from the rest?
ƒ A high number of buyers and sellers.
ƒ A higher number of transactions even
though the total value may be smaller.
ƒ They are able to charge a higher
transaction fee and earn more
nontransaction revenue.
ƒ They offer financial services, not
content or advertising.
Business-to-Consumer Model

• In contrast to those firms using a B2B

model, firms like Amazon and eBay are
clearly focused on individual buyers and
so are referred to as having a business-
to-consumer (B2C) model.
B2C Pure-Play Business Models

Classifications:

ƒ Direct sellers make money by selling

products or services to consumers.
ƒ Intermediaries facilitate transactions
between buyers and sellers and receive a
percentage of the value of each transaction.
ƒ Advertising-based models have ad
inventory on their site and sell it to
interested parties.
B2C Pure-Play Business Models
(continued)

Classifications: (continued)

ƒ Community-based models allow users

worldwide to interact with one another on
the basis of interest areas.
ƒ Fee-based models charge viewers a
subscription fee to view content.
Business Models Examples

Merchant
Brokerage
Advertising
Mixed
Informediary
Subscription
B2C Pure-Play Business Models
(continued)

What separates the top B2C companies

from the rest?
ƒ The top performer had 3.2
times more unique visitors
per month than the median.
ƒ Conversion rate of new
visitors was about twice the
median.
ƒ Revenue per transaction
was about 2.5 times the
median.
B2C Pure-Play Business Models
(continued)

What separates the top B2C companies

from the rest? (continued)

ƒ Average gross margin was

about three times the median.
ƒ No significant differences in
the number of transactions per
customer and the visitor
acquisition cost.
Consumer-to-Consumer Model

• Unlike the B2B and B2C models, which

focus on business transactions and
communications, the consumer-to-
consumer (C2C) model involves the
growing popular use of peer-to-peer
(P2P) software that facilitates the
exchange of data directly between
individuals over the Internet.
Pure-Play C2B Business Models

Categories of C2B models include:

ƒ Idea collectors are companies
that are able to motivate
consumers to submit product
improvement ideas for money.
ƒ Reverse auction companies
allow consumers to submit
binding bids for the purchase of
products such as airline tickets.
Pure-Play C2B Business Models
(continued)
Categories of C2B Models Include:

ƒ Complaint centers allow individuals to

post complaints about a business, view
others’ complaints about any given
business, and interact directly with the
business in question.
ƒ Paid advertising models include
companies that seek to pay consumers to
view targeted ads.
The Bricks-and-Clicks Business Model

Advantages over other models:

ƒ For some product categories, individuals have

to touch, feel, or try on a product before buying.
ƒ Delivering products is a hassle for dot-coms.
ƒ Product returns can be tricky.
ƒ Salespeople can help customers by answering
product questions, providing feedback, and
suggesting other products.
The Bricks-and-Clicks Business Model
(continued)

Organizing for Bricks-and-Clicks:

1. Spin off the online venture.

2. Create a strategic partnership.
3. Create a joint venture between a bricks-and-
mortar store and an online company.
4. Integrate the online operation with the existing
physical operation by creating a division
within the company.
 4 Main Components of a
E-commerce Business Model

Value
ValueCluster
Cluster

Marketspace
MarketspaceOffering
Offering

Resource
ResourceSystem
System

Financial
FinancialModel
Model
 The Trend Toward E-Business

• Much more than a cool Web site!

• E-commerce – the part of e-business
that the customer experiences directly
– B2B (business-to-business)
– B2C (business-to-consumer)
– C2C (consumer-to-consumer)
Six Levels of E-Commerce

Marchak (2000)
– Level 1: minimal online presence – website only
– Level 2: Online catalog
– Level 3: Online order entry
– Level 4: Automated value chain – fully integrated
with the enterprise system
– Level 5: Market site – allow customer to compare
products among competitors
– Level 6: Super market site – Wide spectra of
products are available
Key Issues in E-Business

There are many key issues in e-business,

such as:
– Order fulfillment and accuracy of the order
– Knowing real-time inventory information
Internet-Enabled Enterprise
Systems
• Enterprise system -> Web = Backend
enterprise system + web applications
• So, intranet and extranet
• Then, more issues:
– Customer relationship management
– New business model
– Security
– Etc.
Customer Relationship
Management (CRM)
• Why: The global marketplace and the growth
of the Internet economy require that an
organization have better understanding of
customer requirements if it is going to keep
them as customers
• What: CRM system involves the collection
and recall of large amounts of customer
information, including customer basic
information plus historical information
regarding sales, repair, payment, etc.
• How: Face-to-face, phone, the Internet
Sale Force Automation (SFA)

• Purpose: Sell more with less cost

• SFA is the integration of sales and marketing
processes to generate a sale using less time
and effort
• SFA must satisfy:
– Fewer but more productive sale calls
– Low communication costs
– Low paperwork costs
– Eliminate redundant data entry
– Lower training costs
– Reduce administrative costs
IT’s Role in CRM

• Customer data collection

• Customer data maintenance
• Customer data analysis and report
“A 5% point increase in customer retention yields a profit, in net present value
term, of between 20% and 125%” – Payne (2000)
• So, an organization needs:
– Measurement of customer retention,
– identification of root causes of defection and related key service
issues,
– the cost of acquisition,
– the number of new customers acquired,
– the profitability of retained customers,
– corrective action to improve retention.
• With IT these requirements will be met.
Customer Experience
Management (CEM)
• CEM: Obtaining customer’s view of the
system and system output
• Channels:
– Survey by phone or mails
– Web-based and email-based
• CEM reports the feedback results
B2B E-commerce
Online B2B Growth
• Total US B2B non-service trade will rise from $11.5
trillion in 2000 to $15.1 trillion in 2005.
• The Internet's share of total US B2B trade will soar
from 3% in 2000 to 42% in 2005.
• Internet trade will grow more than 20 times in five
years from $336 billion in 2000 to $6.3 trillion in 2005.
• In 2004, online trade will represent over 50% of total
B2B commerce.
• By 2005, Net Markets will account for 35% of B-to-B
online commerce as compared to 2% in 2000.
B2B Trade Forecast
Online Trade Forecast: Top Five
Industries
B-to-B Online Trade Forecast
B2B’s Attributes
• Huge market opportunity
• Financially light business model
• Scalable
• Acquisition cost effect
• Sticky products
• Multiple revenue stream
Five B2B Generations
• EDI (Buyer-centric)
• Storefronts (seller-side systems)
• Buyer-driven Procurement (Buyer-side
systems)
• Net Markets, Independent or Coalition
• Hosted Private Market
Net Market (4th Generation)

• Net Markets are online intermediaries where

many buyers and many sellers can
congregate to trade. Net Markets essentially
match buyers and sellers using a variety of
market mechanisms including auctions,
catalogs, and Nasdaq-like exchanges. The
first Net Markets were independent entities,
often funded by venture capital, which sought
to be neutral intermediaries between buyers
and sellers.
Net Market Model
Private B2B Marketplaces (5th
Generation)
• The latest model to emerge has been that of private
marketplaces, defined as areas within independent or
coalition Net Markets in which specific buyers can
interact and trade with designated sellers, or vice
versa. Private marketplaces use the technology
infrastructure of the Net Market to create essentially
direct connections between buyers and sellers. This
system saves infrastructure investments for buyers
and suppliers and offers additional revenue sources
for Net Markets.
Three B2B Ownership Models

• Third-party exchanges, e.g. Ventro and

FreeMarket
• Consortia-led exchanges, e.g. Covisint
• Private/Proprietary exchanges, e.g. Dell
– > 745 B2B exchanges have been
announced in the first half year of 2000
– 93% are of the third type
Business Models for
B2B Intermediaries
• Catalog:
– CommerceOne and GM’s TradeXchange
• Exchange:
– Tradex
• Auction
– FreeMarkets
• Negotiations
Case 1 - FreeMarkets Online Inc.

• Pre-select qualified suppliers

• Assess, evaluate & short list
• Conduct global online auctions
• Helping companies with RFQ for custom
components
• 3000 companies from 45 countries participate
in
• Operates about 70 different vertical industries
• $7 million in 1998 commissions
Case 2 - Aeroexchange
• A consortium for 13 airline companies
• offers airframe, avionics, maintenance
services, and general goods and
services
• With web-based applications
Case 3 - Covisint
• Created by Ford, GM and
DiamlerChrysler
• For trading automobile related goods
and services
• Attracts 20+ buyers and suppliers, such
as Nissan, Renault and BASF.
Case 4 - DELL
• Michael Dell started his computer business in 1984
• Dell Computer’s growth
– 1985 – $6 million
– 1990 - $500 million
– 1993 - +40%, but faced operating loss
– 1996 - $7.8 billion
• Dell’s direct sell (started in 1997)
– Order-shipping process 36 hrs vs. regular 75-100 days
– Reduced suppliers from 204 in 1992 to 47
– 13-day inventory
– Cash flow cycle reduced to 24 hrs comparing to Gateway 16.5
days and Compaq 35 days.
– Direct monitor shipping from suppliers
Dell Computer
• Business insight:
– Sell directly to customers
• Decide how much to produce based on demand
estimates & contracts produce on demand
• What makes this approach possible?
– Outsourcing
• Negative holding costs!
– Mass customization
• Powerful order fulfillment system
Start-ups

Knowledge-based stock information service

• TradeTrek.com
– started in 1998 with a seed capital $100,000
– now expanded to Taiwan and Hong Kong
– available cash $6 Million now
– first dividend 33% of the initial investment
B2B Company example
• eAnyway and eMobile
– Headquartered in San Diago
– Produce OEM cellular phones
– Started in June 2000 with the initial investment $300 million
Efficiencies of B2B Electronic
Marketplaces
• A survey conducted in spring 2000:
– Only 1% companies are conducting e-
business through their websites.
– 80% B2B processes are still manual, and
20% considered automated are actually
not yet.
B2B Efficiencies
• Administration costs
• Search costs
• New markets
• Maverick purchasing (buying occurs outside the normal
channel)
• Joint purchasing
• System integration (with the legacy system)
• Supply chain management (from push marketing to pull
marketing)
• Collaboration (Outsourcing product design), joint channel of
distribution
• Middlemen (the new service particularly for small business)
Questions